Sale or equitable mortgage? Consider the totality of facts

Mollie Pawlosky Iowa Banking Law Dickinson Law Des Moines Iowa

Posted on 04/14/2016 at 12:00 AM by Mollie Pawlosky

The Iowa Court of Appeals recently reversed the district court’s summary judgment ruling in Brownlee v. Jamison,  No. 14-1862 (April 6, 2016), concluding that there was a fact issue as to whether the parties had intended an outright sale of real property or, instead, simply the creation of an equitable mortgage.

An equitable mortgage is a lien on property to secure the payment of money that lacks the essential features of a legal mortgage. Iowa courts have long recognized that a conveyance, absolute on its face, may, by proper evidence, be shown to be a mortgage.

In determining whether a conveyance or mortgage was intended, the court decides each case on the totality of its own facts. The court may look beyond the instrument itself and at the parties’ relationship in order to determine the parties’ intent. The ultimate question is whether the parties intended for the deed to serve as security for an obligation; if they did, the court will convert the transaction into a mortgage by operation of law. The grantor must show by clear and convincing evidence that the parties intended for the deed to be a mortgage.

The factual background of Brownlee was complicated; multiple entities were involved, and the parties had engaged in transactions other than the transaction scrutinized by the court. In this complicated factual scenario, the Court of Appeal considered several factors suggesting that the parties intended only a security agreement.

First, the Court of Appeals recognized that inadequate consideration tends to show that the transaction was intended to be a mortgage; in this case, the Brownlees transferred their property to the James D. Jamison Irrevocable trust for $1.8 million, but shortly thereafter, the Jamison Trust sold the property to a third party for $3.25 million. Another indicator the parties intended a mortgage is that the grantor retains possession of the property. The grantor’s retention of possession is consistent with the claim of creditor-debtor relationship and inconsistent with the theory of absolute conveyance. Here, the Brownlees retained possession of the property. Another circumstance evidencing a security interest rather than a conveyance is the creation or existence of a debtor-creditor relationship. Here, the Jamisons Trust had a creditor-debtor relationship with the Brownlees. The right to redeem the property is another circumstance that shows the parties intended a mortgage. If the deed was intended as security, settled law affords the mortgagor the right to redeem. Here, the Brownlees had the right to repurchase the property, on certain conditions.

On the other hand, there was also evidence that the parties intended an absolute conveyance. First, the Jamison Trust was a third party and was not a party to the prior agreements. Second, the Jamisons argued there was no landlord-tenant relationship and that there was no debtor-creditor relationship between the Brownlees and the Jamison Trust.

After considering each of the factors, the Court of Appeals reiterated that the ultimate inquiry in determining whether the parties intended a mortgage or conveyance is the parties’ intent.  Given the “rather unique circumstances of this case,” including the complicated transactional history, the interconnectedness of the defendants and their business operations, and the convictions of the Brownlees for forgery related to the financing of the farming operation, the Court of Appeals could not conclude that the Brownlees established the existence of an equitable mortgage as a matter of law. Thus, the Court of Appeals reversed the district court’s grant of summary judgment and remanded for further proceedings.

Brownlee provides several clear examples of the kinds of evidence that a court will consider in deciding whether to convert a deed into an equitable mortgage. For questions regarding Brownlee v. Jamison or regarding estate mortgages in general, contact Mollie Pawlosky.

The material in this blog is not intended, nor should it be construed or relied upon, as legal advice. Please consult with an attorney if specific legal information is needed.

 

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